Now is the right time to run a bud­get sur­plus

The Irish Times - Business - - FRONT PAGE - John FitzGer­ald

The bud­get per­forms a num­ber of im­por­tant roles. It pro­vides for the fi­nanc­ing of the pub­lic ser­vices in the com­ing year and it is also a key in­stru­ment to man­age eco­nomic growth. In ad­di­tion, the bud­get should also lay the ground­work for longer-term ob­jec­tives, guard­ing against the risk of un­pleas­ant sur­prises, and pro­vid­ing for the im­ple­men­ta­tion of nec­es­sary in­vest­ment.

A ma­jor con­cern com­ing into this year’s bud­get is the con­tin­u­ing cost of over-runs in health. The 2018 un­bud­geted over-run, along with the new base­line it im­plies for 2019, poses sig­nif­i­cant risks.

Con­tin­u­ing un­planned over-runs makes it dif­fi­cult to bud­get for the fu­ture health needs of a grow­ing and age­ing pop­u­la­tion, let alone to im­prove qual­ity and tackle queues for care.

In other spend­ing ar­eas, a bet­ter match be­tween planned and ac­tual spend­ing has been achieved, mak­ing it eas­ier to fo­cus on get­ting good value for money. Be­cause health spend­ing has con­sis­tently out­paced its bud­get, it would be pru­dent to bud­get for a sur­plus else­where to keep to­tal ex­che­quer spend­ing in check.

The Govern­ment has al­ready de­ter­mined the ma­jor pri­or­ity for Bud­get 2019 is to steadily in­crease pub­lic in­vest­ment to around 4 per cent of na­tional in­come in the early 2020s. This is nec­es­sary to deal with the econ­omy’s grow­ing pains, most acutely seen in the cur­rent hous­ing cri­sis.

Given this pri­or­ity, there is very lim­ited scope for im­prov­ing pub­lic ser­vices, un­less there is an in­crease in tax­a­tion.

Pop­u­la­tion change has im­pli­ca­tions not just for health and so­cial care, but also for spend­ing on ed­u­ca­tion and par­tic­u­larly State pen­sions. With pen­sion spend sched­uled to rise steadily as a share of na­tional in­come, and as present low in­ter­est rates will not per­sist in­def­i­nitely, it would be pru­dent to grad­u­ally re­duce our na­tional debt and open up some needed fis­cal space. The ex­pe­ri­ence of the fi­nan­cial crash in 2008 shows the im­por­tance of us­ing the bud­get to main­tain bal­anced growth – to take the steam out of a very rapidly grow­ing econ­omy and pro­vide a govern­ment stim­u­lus when the next re­ces­sion comes.

Rapid growth

It is the change in the sur­plus or deficit that reins in or stim­u­lates the econ­omy. With our econ­omy grow­ing rapidly and al­most at full em­ploy­ment, now is the time to run a sig­nif­i­cant bud­get sur­plus, and if rapid growth per­sists next year de­spite Brexit, an even big­ger sur­plus would be the right stance for 2020. Many other small EU coun­tries that are also ex­pe­ri­enc­ing sig­nif­i­cant growth have al­ready moved into sur­plus and are cre­at­ing the space to ad­dress any fu­ture down­turn.

As the Depart­ment of Fi­nance’s debt re­port shows, the Na­tional Trea­sury Man­age­ment Agency has grad­u­ally re­fi­nanced our na­tional debt with new long-term bor­row­ing, lock­ing in the cur­rent very low in­ter­est rates for the next decade. The re­sult­ing in­ter­est sav­ings have freed up ad­di­tional re­sources to ex­pand ex­pen­di­ture. While some con­tin­u­ing sav­ings in in­ter­est will ma­te­ri­alise this year and next, this will come to an end as mone­tary pol­icy grad­u­ally tight­ens and in­ter­est rates move off their cur­rent floor.

To run a counter-cycli­cal govern­ment sur­plus next year, we will need to look to ad­di­tional tax­a­tion to ac­com­mo­date our grow­ing pop­u­la­tion, in­vest in in­fra­struc­ture and pro­vide lim­ited im­prove­ments in the level of pub­lic ser­vices.

In­crease taxes

In choos­ing where to in­crease tax­a­tion there are a num­ber of con­sid­er­a­tions. First, as 2008 so painfully showed, core pub­lic spend­ing should not be de­pen­dent on a volatile tax base. Se­condly, given that where tax­a­tion falls has knock-on ef­fects on the rest of the econ­omy, it is bet­ter to tax ac­tiv­ity that has a low or neg­a­tive

It makes much more sense to in­crease the tax on green­house gas emis­sions, than to raise taxes like PRSI that im­pact on em­ploy­ment

so­cial value rather than to dis­cour­age ac­tiv­i­ties that have pos­i­tive spin-offs.

Fi­nally, tax changes should be pro­gres­sive. There­fore, it makes much more sense to in­crease the tax on green­house gas emis­sions than to raise taxes such as PRSI – ones that im­pact on em­ploy­ment. There is scope to raise an ad­di­tional €250 mil­lion through ex­tra car­bon taxes – though some off­set­ting spend­ing would be re­quired, for ex­am­ple on wel­fare pay­ments, to soften the im­pact for those who could least af­ford it.

Taxes on prop­erty, which can­not move, are prefer­able to higher taxes on in­come, which can af­fect em­ploy­ment and mi­gra­tion flows. Depart­ment of Fi­nance re­search shows the im­pact of with­draw­ing the low VAT rate on ho­tels and restau­rants, worth €500 mil­lion, would af­fect prof­its more than prices. When these sec­tors are boom­ing, it is a good time to act.

Fi­nally, as in last year’s bud­get, there is fur­ther scope to in­crease some taxes to pro­mote a more ap­pro­pri­ate bal­ance be­tween build­ing homes and other con­struc­tion projects.

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